Thursday, January 10, 2013

Apple Inc. (AAPL) and Samsung Electronics Co. LTD (BC94) do not get along, and it is no secret that they're bitter rivals. However, Apple has been Samsung's largest customer when it comes to the chips they build for smartphones. The iPhone has long contained Samsung chips, and this has been a sore spot for Apple of late.

In fact, Apple has recently announced they will be migrating away from Samsung as supplier of components for their products. No doubt, Tim Cook and the other executives at Apple expected Samsung to be in a position to lose revenue from this decision, but it appears that is not the case at all.

In response to Apple's desire to cut Samsung out of its supply line completely, Steven Woo told Reuters that the Korean tech giant has plans to "diversify our customer base". According to CNET's Don Reisinger, he said, Samsung has already taken steps to do this by adding "some Chinese customers."

Apple spends approximately $8.8 billion on Samsung processor chips, which makes up nearly 80% of the Korean company's business in the field, according to Goldman Sachs. However, with Apple looking to begin moving its business to other companies, and cut orders to Samsung by 80% by the year 2017, it's probably wise for Samsung to be building a wider customer base now.

According to the Commercial Times, this transition to other companies has already begun. Apple and Taiwan Semiconductor struck an agreement on a trial run of A6X processors, and it is assumed that if this run goes well, then the company could quite well receive all of Apple's business for the A6X processors.

Apple and Samsung have had several run-ins over the last twelve months. With various patent suits filed all across the world, judges have returned mixed decisions in the issues. While Judge Lucy Koh awarded Apple $1.05 billion in a suit filed in California, a U.K. judge ordered Apple to post a public apology to Samsung on their U.K. web site. It would appear that the rivalry is now affecting their business relationship, as Apple would prefer to inject capital into companies it is not in direct competition with.

While Goldman Sachs notes that it is wise for Apple to move its business elsewhere, finding a company that will provide the chips as efficiently and cost effectively as Samsung has will be quite a challenge. It will be interesting to see who will finally win the contract, or if it will have to be delegated to several smaller companies. Only time will tell.